As long time readers of this blog know, my family has been renting an apartment in NYC for the past 2.5 years. My husband bought a 1-bedroom shortly before we got married, and we sold it, as it turned out, at the exact bottom of the real estate market. Partly because the real estate market was in flux, and partly because we weren’t sure where we wanted to live long term, we rented a 2-bedroom apartment in the same building, and we’ve just kept re-signing the lease. For a variety of reasons, it looks like we will not be able to do that again this summer. So now what?
It’s a complicated question, but may involve buying a home, most likely outside NYC. As I’ve been researching our options, I’m reminded just how much our government privileges going into debt to buy a house. Not only is the mortgage interest deductible, in many cases the interest rate has been lower than it would be due to the existence of Fannie and Freddie (we will see how that all shakes out now).
So why, exactly, do we elevate home ownership as this good worthy of billions of dollars of subsidies? Policy makers claim that home ownership is a good with positive externalities. It helps people build wealth, and leads to stable communities, in which there is lower crime and better maintenance, and kids do better in schools.
But all of these have a flip side. There’s an interesting article on some of them here (discussing Was Home Ownership Overrated?) People say that renting is “throwing money away,” but if your home declines in value prior to your needing to move, home ownership means throwing money away too. Millions of people have lost equity in their homes over the past few years. Some will stick around long enough to recoup it, but if your home declined 25% in value (not unusual in some of the bubble areas) it’s going to take many years of 2-3% growth to get there. Assuming that 2-3% growth starts up again soon. Plus, home owners have money that’s being thrown away too, in the form of property taxes, closing costs, etc. A landlord can build these into the rent, but at least here in NYC rents are low enough relative to mortgages that you really can’t.
Subsidizing the single-family, detached house has caused Americans to move far out into the suburbs and exurbs (“drive until you qualify.”) This adds to commute times. Commuting, in studies of subjective well-being, is pretty much the low point of people’s lives.
As for stable communities, this is also a way of saying that the transaction costs in buying and selling a home are incredibly high. You usually lose money if you move within a few years. Stability sounds nice, but you could use the words “high friction” instead, which sounds less positive. With our fast-moving economy, you want people to be able to move where the jobs are. Many home owners these days are stuck in areas of rising unemployment, unable to move to areas of lower unemployment because, shockingly, housing prices are also falling in areas of higher unemployment. Obviously, there are arguments that it’s nice when people stick around and get to know their neighbors, and their kids attend the schools for decades, and the parents have time to get involved in civic organizations, but these have to be weighed against the problem of people being trapped.
All the subsidies means that there’s not really a great supply of nice rentals in good school districts. So we will probably wind up buying. But one of the reasons this has been such a difficult decision is that we’re not sure we want to commit to one area for multiple years. What do you think, is home ownership a good deal or not?
In the long-term, home ownership is usually a positive financial move for those who want that stability and are able to make it to the long term, but not everyone is able to handle the financial responsibility or the time commitments, and there are many who would view the stability as a tether rather than as a safety net.
In general, not.
I say this as a homeowner, and as someone who has sold a home and bought a new home in the past year. You noted that the transaction costs are high, but the ongoing costs and maintenance are also very high. Homeowners have to deal with home insurance, property taxes, the full load of utilities (some of which may be taken care of in a rental), the need to monitor and do routine maintenance throughout the year, and having to bear the cost and stress of urgent, sometimes major, repairs. Not to mention that if you want to upgrade or renovate, you’re looking at a very costly and disruptive project.
We bought our home anyway because stability is important to us and we see ourselves remaining in our current home for decades to come. We had strong ties to our town and neighborhood before we moved into our current place. We like the idea of being completely in control of our home instead of being at the mercy of a landlord. We like not having to share our living space, which means we don’t have to worry about making noise or otherwise annoying people who are living nearby. We believe our house will maintain its value based on its location, but we’re not looking at it as a financial investment.
For psychological reasons, homeownership works for us, but if someone is perfectly happy renting I think it’s a better deal both financially and in terms of stress and freedom.
@CM- I get the landlord issue. We’ve had to wait way too long on a few repairs — to the point where I would have preferred to pay for them on my own.
I don’t think it’s a yes or “not” question. It depends on each individual or family and what city or town you live in. For the most part if you aren’t planning on being in your home for more then 2-3 years then renting is almost always a better solution. However, my story is this. I live in Louisville KY and bought my first house for $89,000. I put 3% (less than $3000)down with and FHA loan. My mortgage with my roommate was less than the rent we were both paying. I sold it 2.5 years later for $105,000. I was able to take that money and purchase a house in a much better part of town that needed some work. We bought that house for $160,000. My husband and I worked on the house as we lived there over the next five years doing weekend projects etc. We did replace the roof and HVAC which cost around $13,000 along the way. We sold it in November of 2007 (as the market was turning) for $270,000. After all was said and done we had we had about $80,000 to put down on our next house or do whatever we wanted. (amazing!)This is not about flipping houses as we both had full time jobs and kids, this is about investing in home ownership. I firmly believe in it so much during my experience that I became a Realtor about a year after I purchased the house for $89,000. Since then I have started my own company in 2007 and have truly enjoyed and have had success in helping people buy homes. So yes, I’m a little biased when I lean towards home ownership as a great thing, but still understand it’s not for everyone.
@Ashley- that’s great that you were able to make such a tidy profit on your house. Do you know what it would have gone for if you’d had to sell in, say, Nov 2009 instead of Nov 2007? I think what people don’t think about is that all asset classes have their risks. It doesn’t make sense to be in stocks with, say, a 4-year horizon, and it may not make sense to buy a house with that time horizon either.
In urban areas, there are upscale condo/apartment choices that are liveable. In much of the country with lower housing costs, rental properties have very outdated appliances. (When I was looking in 1997, several properties had refrigerators where the freezer was a sub-box of the refrigerator, rather than a separate compartment. I think they were from the 50’s.) My cousin had to call his dad to figure out how to light a gas pilot light in his oven.
My line to urbanites who don’t understand why those of us in rural areas choose to own is, “I prefer to have neighbors who don’t involve the police in their marital disputes.” It is the neighbors, not the dollars, that make renting in many areas undesirable.
As someone who grew up in a garden apartment I looked forward to owning a house; for the privacy, and the noise issue.
I agree with CM, that it’s a personal choice. We chose our area based on the good schools and close proximity to our jobs (my 7 minute commute is the longer one), as well as being near family.
We have been here for 13 years now, and refinanced a few times, lowering our payments and the length of the mortgage each time. We too, have had our share of urgent, costly repairs. (none of which added any resale value to the house)
That being said– I loved my house when we bought it (we looked at over 75) and it met our needs, though it needed new windows etc. Now, I’d love a different floor plan, which requires renovation. There is a house for sale around the corner that looks perfect, but I’m afraid to even go look at it b/c we won’t make enough on the sale to lower our mortgage and it will add back the years we shaved off with the refinances. We are trying to weigh the costs of renovation vs. buying a different house. As LR said, now I feel tethered by what was once a safety net.
In addition to that, my husband’s company has been in a state of change over the past few years. We are waiting on the results of the ‘facilities study’ to see which offices will remain open and which will be closed/consolidated, yet I think if we have to move I’d buy again, rather than rent.
One advantage to home ownership is having the home paid off before you retire so you don’t have a monthly mortgage or rental bill due each month. Yes, you still have maintenance costs, taxes, etc. but those typically are a lower amount than if you were paying rent each month.
Funny you should write on this topic and barely mention that home ownership is extremely time-consuming. Certainly, when thinking of you and your notion that we have more time than we think, I always think, “but she lives in an apartment!” I won’t even bother listing all the routine chores, and then there is always a special project going on. This takes a huge chunk of your time. I’m not saying there’s no satisfaction or beneficial exercise to it (shoveling, raking, mowing, etc), but you can’t deny the time-sucking factor. I don’t have any opinion on whether you should buy. There are a lot of factors, and they vary depending on location and lifestyle and such.
@Hydrangea, that is so true! We do our best to align our time by having the kids rake, shovel, change the yard from winter to spring and back again etc. Plus, if you rented a house you’d probably still be doing some of those things, even though I recently found out that in NY it isn’t always legal for a tenant to shovel snow for a landlord.
@La Dawn, one reason we don’t want to move again is that our mortgage will be paid the year before our first son starts college, so I guess we’ll just be moving that money from one place to another.
These are all good points — homeowners spend more time on maintenance than renters. This is one of the reasons public policy views home ownership as a positive: neighborhoods look better. On the other hand, it is a definite suck on the home owner’s time!
For you, I don’t know if home ownership is a great option. The reasons:
– You are reticent about committing to one place for a number of years. Generally speaking (and this is extremely general), you need 5 years for the benefits of buying to catch up with renting. One of renting’s largest benefits is the ability to pick up and leave when the lease is up. That’s far more difficult to do when you own. There are numerous calculators available on the web (the NYTimes has an excellent interactive graphic) to help with this part.
– From reading your book, I’m betting there are home-ownership chores that you will look to outsource. Look into the costs of these things. Yard work, general repair, improvements, snow removal, gutter cleaning, weeding and other minute can be something you truly enjoy or something you abhor, and they aren’t included in the mortgage.
– You might find the best (or worst) of both worlds by looking into condos or co-ops. These come with their own set of caveats. Ditto for buying a home with a HOA.
I’m a homeowner and I generally like it. But then again, I like doing handyman work, find cutting the lawn soothing and don’t mind getting my hands dirty on home improvement projects. I will confess that I’m kind of sick of snow removal at this point, though. Were I to hire these things out they would likely add at least a few hundred dollars a month to the cost of the house.
There are also benefits to city life, especially NYC. There’s a reason millions of people call it home. Many of those reasons are not nearly as prevalent or available in the suburbs.
@Jason – like getting Thai food delivered at 2am? Oh, I know…